With negative monthly returns for almost all asset classes, the 2022 investment year ended in a minor way. Equities quoted lower across the board and so did most bonds. Indeed, interest rates ran briskly again. The Fed met for the last time for the year and raised the policy rate by 50bp. That was factored in by market participants, the accompanying message from the Fed, however, was not: more rate hikes are coming as long as inflation does not move steadily toward 2%. The ECB also raised interest rates by 50 bp (now at 2%), delivering a message along similar lines. The dollar lost ground on balance, ending the month at 1.07 (-3%).
Shares
The MSCI All Countries World Index fell 7.3% (measured in euros) in December. As in November, emerging markets (-4.9%) again outperformed developed markets (-7.6%).
Within developed markets, North America was weak (-9.2%) compared to Europe (-3.5%) and Japan (-3.3%). Within emerging markets, there was not much difference between regions, but there was at the country level. For example, Argentina posted strong gains (+8.6%) and Peru lower (-11.5%). It was (again) a month where ‘growth’ lost out to ‘value’; we saw that confirmed partly at the sector level, where IT was the worst performing sector with a negative return of -11.0%.
Bonds
Central banks’ messages did not miss their impact: German 10-year interest rates rose sharply by 0.64% to 2.57%. US 10-year rates rose less sharply (by +0.27% to 3.88%). Nevertheless, the risk premium for less risky corporate bonds was lower for the month of December (-0.12% to 1.67%), as was the case for emerging market government bonds (-0.15% to 4.53%). For more risky corporate bonds, however, the premium was higher (+0.07% to 5.15%).